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Covanta Holding Corporation (CVA - Snapshot Report) reported adjusted earnings per share of 10 cents in the second quarter of 2013, surpassing the Zacks Consensus Estimate by an impressive 150%.

However, second quarter earnings fell short of the year-ago figure of 15 cents per share. The earnings decline was mainly due to lower equity income.  

Including a 39 cent net write-off loss, a 2 cent loss related to U.K. severance and other restructuring as well as a positive income tax impact of 1 cent, GAAP loss was 30 cents per share in the reported quarter versus earnings of 15 cents in the year-ago quarter.

Operating Highlights

Total revenue was $413.0 million in the quarter, outpacing the Zacks Consensus Estimate by 2.5%. The second quarter top-line narrowly beat the year-ago figure of $410.0 million.

Revenue increased on the back of effective execution of organic growth programs like special waste and metal recovery, expansion of the Honolulu unit and contract additions. This was partially tempered by decrease in construction revenues as well as in revenues earned to service project debt. Moreover, favorable energy market prices were mostly offset by weak metal market price.

Operating expenses in the second quarter were $409 million, up 15.5% from the year-ago quarter owing to higher plant maintenance costs and depreciation as well as amortization expenses. The cost escalation was eased partially by an $8.0 million profit from a power purchase agreement buyout.

The marginal improvement in revenue offset by the substantial cost increase resulted in operating income shrinking 93% year over year to $4.0 million.


Covanta Holding reiterated its adjusted earnings guidance for full year 2013 in the range of 40 cents to 50 cents per share. Free cash flow for 2013 is expected in the range of $250-$280 million.

Adjusted Earnings Before Interest, Tax, Depreciation and Amortization (EBITDA) is projected in the range of $500 million to $530 million in 2013. The company estimates total growth investments for 2013 in the $75-$100 million band.

Financial Highlights

Cash and cash equivalents as of Jun 30, 2013 were $205.0 million, down from $246.0 million as of Dec 31, 2012.

Long-term debts as of Jun 30, 2013 were $1,573.0 million versus $2,012.0 million as of Dec 31, 2012.

Cash flow from operating activities in the six months ending Jun 30, 2013 was $97.0 million compared with $144.0 million in the six months ending Jun 30, 2012.

Shareholder Returns and Liquidity

In the second quarter of 2013, Covanta Holding repurchased shares worth $10 million.  As of Jun 30, 2013, the company had remaining share repurchase authorization of $116 million. From the commencement of Covanta Holding’s share buyback program in 2010, the company has repurchased 27.5 million shares at a weighted average cost of $16.22 per share.

Our View

Covanta Holding made a favorable comeback in the second quarter of 2013 with its top and bottom line beating our expectation. We believe the company’s focus on organic growth-centric projects will continue to boost its future prospects given the abundance of landfills in the U.S.

Furthermore, Covanta Holding’s presence in China will open up opportunities to expand the company’s operation.

However, the soft macroeconomic conditions remain a concern. Covanta Holding currently carries a Zacks Rank #3 (Hold).

Other waste management companies yet to release their second quarter 2013 earnings are Waste Management Inc. (WM - Analyst Report), Ormat Technologies Inc. (ORA - Snapshot Report) and Gevo Inc. (GEVO - Snapshot Report).

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